Sequestration II: Expect Budget Rollercoaster In 2014

Think federal sequestration is in the rear-view mirror? It's not. Chances are we'll have to go through another round of belt tightening in 2014.

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As the end of the federal fiscal year draws to a close, vendors and contractors are anxiously awaiting the government's last-minute release of funds, so that deals can finally come to a close (and sales quotas can be met). Businesses enjoyed a flurry of activity from government agencies during the months of January and February, but agency spending tightened up from March through June as the year's second continuing resolution for funding was passed in place of a budget, and sequestration was formally implemented.

Holding money close to the chest in the middle of the fiscal year is no new trick for the government; budget uncertainty typically forces program managers and contracting offices to be more restrained in their spending. This year proved different, of course, as the mix of continuing resolutions and sequestration demanded an even more conservative approach to fiscal management.

By some estimates, information technology contract spending in fiscal year 2013 will drop 8% from 2012. Fortunately for companies selling to government, agencies still have 35% to 40% of their IT money left over. So even in the most grim scenario, upward of $40 billion still might be spent on IT contracts in the last quarter of fiscal year 2013.

The frightening specter of sequestration did in fact materialize, and the world did not stop turning, as many would have had us believe. The cuts, however, were sorely felt by a large number of agencies. For an even larger number of vendors, cuts represented a major setback to their financial performance, and therefore a slowdown to the economic recovery. Well, good thing the economy doesn't have to suffer through sequestration again next year.

Or does it?
In my discussions with product manufacturers and systems integrators, it's becoming clear that that many in the industry seem to think federal sequestration is completely in their rearview mirror. And this scares me.
Remember that sequestration was a component of the Budget Control Act (BCA), which stipulated that if Congress was not able to reach an appropriate deficit reduction plan, automatic cuts in spending authority would take place -- to the tune of about $85 billion in fiscal year 2013.

The good news is that once the sequestration was implemented in fiscal year 2013, Congress had already been given a roadmap to follow, and an opportunity to avoid further cuts in the future. The bad news is that Congress decided to leave the map at home.

Clearly, it was never in the cards for lawmakers to agree on a reasonable deficit reduction plan. The fallback position was to comply with spending levels set by the BCA. And the BCA stipulates that discretionary spending in fiscal year 2014 should not exceed $1.058 trillion ($475 billion for Department of Defense and $583 billion for civilian agencies), with additional deficit reduction plans. If Congress decides that agencies should be granted more discretionary funds than outlined in BCA, but does not agree on a deficit reduction plan, we will all have to go through another round of sequestration in the 2014 fiscal year.

The plan the House has outlined would bring discretionary spending down to $967 billion for the year, thereby avoiding further sequestration cuts. And yet, $513 billion of that budget is still allocated to the Department of Defense, thus entirely ignoring the BCA spending caps for DOD and requiring all cuts to come from civilian agencies.

The Senate's plan would stay within the $1.058 trillion limit on discretionary spending, but still allocates more money to DOD than the BCA caps allow. It also would rely on future agreements on a deficit reduction plan to avoid sequestration.

The bottom line here is that the houses of Congress yet again can't agree on the best path forward, and we will most likely have to deal with another round of sequestration in fiscal year 2014.
If the BCA were implemented as intended, then Congress would create a budget for the next fiscal year. But instead of growing at a 6%-to-7% clip year over year, budgets would grow at a more modest 3% to 4%, circumventing the need for an eventual sequestration.

Although we all witnessed the political theatre that surrounded sequestration in fiscal year 2013, and had to endure the negative impact it had on agencies and on industry, Congress is not doing anything to avoid the same situation in fiscal year 2014. Any American business selling to the government would do well to prepare to experience déjà vu all over again.

Part of this roller coaster that many aren't seeing is the impact this is having on federal IT talent. Some new research about to come out here on InformationWeek shows that the proportion that IT workers 50 and over outnumber younger workers (under 30) by nearly 11 to 1 -- that's up from 9 to 1 two years ago. And sequestration,and the uncertainties of future program funding are one of the reasons that a lot of mid tier folks are looking elsewhere, while the older IT workers wait till they can retire.

Great article. I am doubtful Congress will ever come up with a comprehensive debt reduction plan. They saw that indeed the world didn't come crashing to an end with sequestration and have tacitly come to accept that it is here to stay. Let's hope that when a budget or omnibus is passed, the agencies are given more say in how the cuts are implemented.

The worse part of this is the continuing prospects for incremental funding by Congress which leads to extended uncertainty for agencies and contractors, more diffused investment decisions, and ultimately, more costly government.